The principal purpose of managerial accounting is to deliver information useful for management decision-making. Many of the techniques used in managerial accounting are useful for decisions in your everyday life.
- In choosing whether to take an online course or a traditional face-to-face course, how might you use planning, controlling, and evaluating in your decision-making process?
- What types of financial and non-financial information might you?
Managerial accounting can be defined as “the practice of identifying, collecting, sorting, estimating, and analyzing cost, performance, and other information to make timely decisions and to plan and control the future through budgets, forecasts, and estimates.” (William H. Webster, Accounting for Managers, 2004). As a manager in a corporation or owner of your own business, you need to know some of the tools to find and analyze relevant accounting data to make good business decisions. So, we begin with a discussion on the role of managerial accounting in planning, directing and controlling business operations.
Planning
Management accounting information is used to forecast and plan. Managers use accounting information to develop goals and strategies for the future. Their ability to forecast and plan depends on the budgets that are developed from accounting data. Budgets express the company’s plan of action using quantitative figures. The budgeting process allows managers to allocate resources where needed and eliminate programs and departments that are not effectively using the resources.
Directing
In order for management to realize the goals and objectives developed in the planning phase, resources must be available and put in place. Directing is said to be a process in which the managers instruct, guide and oversee the performance of the workers to achieve predetermined goals. Managerial accounting supports the “directing” function in many ways. Once a manager set goals and develops a plan, the next step is to identify and direct resources that are necessary to reach the goals. Directing involves coordinating and allocating those resources and activities where needed.
Controlling
The control function is the process of evaluating whether the organization’s plans were implemented effectively. For example, assume Ernst & Young creates a budget indicating the labor hours needed to perform tax services for a particular client (this is the planning function). After the work is performed, actual labor hours used to complete the work are compared to budgeted labor hours. This analysis is then used to evaluate whether employees were able to complete the work within the budgeted time and often results in recommendations for the future. Recommendations might include the need for adding more labor hours to the budget or obtaining better support documents from the client.
Management accounting helps in the control function by producing performance reports and control reports which highlight variances between expected and actual performances. Such reports serve as a basis for taking necessary corrective action to control operations.
